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Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
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XXXXX
XXXXX
XXXXXXXXXX
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Case Number: 38343May 2, 2003
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Subject:
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GST/HST INTERPRETATION
Input Tax Credit Claim and Filing of Section 211 Election by City of XXXXX
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Dear XXXXX:
Thank you for your memorandum XXXXX (with attachments), which was forwarded to us from XXXXX GST/HST Rulings Centre XXXXX. This letter provides a written response to the reply provided verbally in our telephone conversation XXXXX.
Statement of Facts
1) XXXXX (the Utility) and the City entered into an Agreement to Lease dated XXXXX. In this Agreement the parties agree to enter into certain new arrangements including a XXXXX lease/lease-back arrangement of certain XXXXX Assets XXXXX XXXXX within the municipal boundaries of the City.
2) Pursuant to the Agreement to Lease, the Utility and the City entered into the XXXXX Lease dated XXXXX (Head Lease) whereby the Utility, as lessor, leased the XXXXX Assets to the City, as lessee. The Head Lease has the following terms relevant to the issues of this interpretation:
(a) The XXXXX Assets will remain property of, and title to the XXXXX Assets will remain in, the Utility;
XXXXX
(b) The City shall retain possession and quiet enjoyment of the XXXXX Assets until the end of the lease term;
XXXXX
(c) The Head Lease calls for a lease term of XXXXX years;
XXXXX
(d) The Utility has the right of early termination after XXXXX years of the lease term has lapsed;
XXXXX
(e) The City agrees to pay an annual rent for the XXXXX Assets and the parties acknowledge that the GST is applicable to the rent payments;
XXXXX
(f) The City is granted the right to prepay XXXXX % of the total annual rent for the lease term at the present value of the annual rent over the lease term using a discount rate of XXXXX % (note, this right was exercised by the City);
XXXXX
(g) The Utility acknowledges and agrees that the City shall be permitted to assign or sublet the XXXXX Assets to another party to operate as contemplated in XXXXX
(h) Where the City assigns or sublets the Head Lease or the XXXXX Assets, such assignment or subletting shall not merge with the Head Lease; XXXXX and
(i) The "lessee[City] agrees that the XXXXX Assets remain the property of the Utility notwithstanding the manner in which or the degree to which the same may be attached or affixed to realty"; XXXXX
3) The City and the Utility entered into the Sublease dated XXXXX (Sublease) whereby the City, as lessor, subleased the XXXXX Assets to the Utility, as lessee. The Sublease XXXXX has the following terms relevant to the issues of this interpretation:
(a) The XXXXX Assets, defined in the Sublease, are the same as the XXXXX Assets defined in the Head Lease; XXXXX (Note, since the definition of XXXXX Assets in the Head Lease is the same as the definition of XXXXX Assets in the Sublease, use of the term XXXXX Assets in this letter is meant to refer also to the XXXXX Assets, where applicable.)
(b) The Utility may retain possession and quite enjoyment of the XXXXX Assets until the end of the lease term;
XXXXX
(c) The term of the Sublease is XXXXX years;
XXXXX
(d) The Utility agrees to pay to the City an annual rent for the XXXXX Assets in accordance with the rent formula set out in XXXXX and the parties agree that the rent is subject to GST;
XXXXX
(e) The City, as lessor, has a good and marketable leasehold interest in the XXXXX Assets;
XXXXX
(f) The Utilities full present and future legal and beneficial right, title and interest in the XXXXX Assets XXXXX XXXXX are collectively referred to as "Personal Property";
XXXXX
(g) The Utilities full present and future legal and beneficial right, title and interest in and to all easements, rights-of-way, privileges, licences, improvements, and similar interests and rights in land in the City relating to the "Personal Property" (noted above) are collectively referred to as "Real Property"; XXXXX
4) The City borrowed money from the XXXXX to cover the prepayment of rent under the Head Lease as well as various administrative costs associated with these transactions/arrangements. The terms of the City's financing coincide with the stream of rent payments payable to the City from the Sublease.
5) The City and the Utility entered into the XXXXX Agreement dated XXXXX for the purpose of: extending the existing XXXXX Agreement (A XXXXX agreement in this context provides for a municipality to grant a utility company both an exclusive right to supply a public utility (e.g. natural gas, electricity) to residents of the municipality and a right to enter upon certain lands within the municipal boundaries in order to carry out its business of supplying a public utility.) from XXXXX to XXXXX; terminating the XXXXX contained in the existing XXXXX Agreement; and ensuring that the XXXXX Agreement, except for these alternations, continues in full force and effect.
6) Pursuant to the Agreement to Lease, the City and the Utility agree that all of the components of the transactions (1-5 above) are to be implemented concurrently such that all components will proceed or none will proceed.
7) In the XXXXX agreement currently in force the XXXXX is granted by the City to the Utility. (Note although we were not provided with a copy of the new (i.e. current) XXXXX agreement, we assume from the terms of the XXXXX Agreement XXXXX and the terms of the XXXXX Amendment Agreement, that the real property rights granted in the former agreement remain in the new agreement.)
Interpretation Requested
Your have asked for our reply as to whether the City is entitled to claim input tax credits (ITCs) for the GST payable to XXXXX (the Utility) for the lease of property, defined as the XXXXX Assets XXXXX in the Head Lease, XXXXX from the Utility. Establishing the City's ITC eligibility requires determining whether the supply of the XXXXX Assets made by the City to the Utility pursuant to the Sublease is a taxable supply for GST purposes (The City is considered to have acquired the XXXXX Assets (under the Head Lease) for the purpose of making a supply of those assets (under the Sublease). Thus, in accordance with subsection 141.01(2), where the supply of the XXXXX Assets under the Sublease is a taxable supply, the City is deemed to have acquired the XXXXX Assets in the course of a commercial activity.). The tax status of the City's supply of the XXXXX Assets to the Utility is based on the following issues:
1. Whether the City is eligible to file an election under section 211 of the Excise Tax Act (ETA) in respect of the XXXXX Assets. In particular, are the XXXXX Assets "real property acquired [by the City] by way of lease licence or similar arrangement for the purpose of making a supply of the property (i.e. the XXXXX Assets) by way of lease, licence or similar arrangement" as described in paragraph 211(1)(c) of the ETA?
2. Whether the description of the XXXXX Assets in the section 211 election filed by the City is sufficient in terms of completely and uniquely identifying the subject property for purposes of the section 211 election.
3. Related to the supply of XXXXX Assets and their characterization for GST purposes there is a GST issue concerning whether the new XXXXX agreement provides for the making of taxable supplies of real property by way of licence. Further to this, the issue is whether the former XXXXX Agreement XXXXX was replaced with a new agreement or was simply amended and extended by the XXXXX Agreement XXXXX.
Interpretation Given
Based on the information provided, we provide the following interpretation.
1. The City is eligible to file an election under section 211 of the Excise Tax Act (ETA) in respect of the XXXXX Assets. The XXXXX Assets are real property acquired by the City by way of lease licence or similar arrangement for the purpose of making a supply of the XXXXX Assets by way of lease, licence or similar arrangement, as described in paragraph 211(1)(c) of the ETA.
2. Property subject to the section 211 election must be uniquely identified. In the case of real property acquired by way of lease, licence or similar arrangement, this would generally require an accurate and complete description of the property that was acquired and supplied by the public service body (PSB).
In this case the identification of the XXXXX Assets on the GST 26 election form would require an extensive description including supporting documentation XXXXX. Thus it is our view that it would not be unreasonable in this case to permit the City to describe the subject property by reference to both the Head Lease and the Sublease in which the XXXXX Assets were both acquired and supplied by way of lease, respectively. For example the following wording may be used on the GST 26 election form:
XXXXX We note that pursuant to the Head Lease and the Sublease, additions to the XXXXX Assets made after XXXXX are excluded from the XXXXX Assets both acquired and supplied by way of lease under the Head Lease and Sublease, respectively. An exception occurs only where the City chooses to exercise an option to acquire and re-supply the additions, by way of lease, in accordance with the XXXXX Option XXXXX.
If the City where to exercise the XXXXX Option and increase the XXXXX Assets included in the leasehold, the issue arises as to whether the CCRA would permit an amendment to an election revising the property described on the election form or require that a new election be filed. In terms of filing a new election the options include (1) a new election that covers both the original leasehold and the addition or (2) a new election that covers the addition only. In our view this is largely an administrative matter not addressed in the ETA that falls within the purview of the Compliance Programs Branch.
XXXXX.XXXXX
3. Supplies of the XXXXX granted by the City to the Utility under the XXXXX Agreement currently in force (The former XXXXX Agreement XXXXX XXXXX was for a term of XXXXX years. This former agreement was "amended" in accordance with the XXXXX Agreement XXXXX XXXXX.) are supplies of real property made by way of licence.
In addition, XXXXX the former XXXXX Agreement was replaced with a new agreement entered into after XXXXX. As a result, supplies of real property in the new XXXXX Agreement, that are of the same description as in the former XXXXX Agreement (noted above), are excluded from exemption under section 25 of Part I of Schedule V to the ETA in accordance with subparagraph 25(f)(ii).
Since no other exemption applies to such supplies of real property made by a municipality, the Utility is required to pay GST and the City is required to collect and remit GST at a rate of 7% on the value of the consideration payable for such supplies of real property.
Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 954-8852.
Yours truly,
Daryl J.A. Hooley
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
XXXXX
| Legislative References: |
definition of "real property" in subsection 123(1); section 211, section 25 of Part I of Schedule V to the ETA |
| NCS Subject Code(s): |
I-11950-1, 11870-1 |
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XXXXX1. XXXXX2. XXXXX |
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